Property & Special Tax

Question 1

What is the UNICAP threshold for companies?

Answer 1

Must be used if produces real or tangible personal property
Avg annual gross receipts for past 3 years of more than $10 million (If under threshold and acquire for resale, do not need to capitalize)

Question 2

UNICAP acquisition or production costs rules

Answer 2

• de minimis safe habor election 5,000 per invoice/item
• threshold used for F/S audit is used for tax
• must prepare audited F/S (if not, subject to 2,500)
• property with 12 months or less also be deducted (w/ comparable policy)
• if take election, can also apply to repairs/maintenance
• “all or nothing” basis, if cost exceeds must capitalize

Question 3

UNICAP repairs and maintenance rules

Answer 3

• expense when incurred to keep operating efficiently and effectively
• annual election to capitalize if similar to books
• Qualified Small Taxpayers (Avg gross receipts < $10 million in previous 3 years) can expense up to lesser of 10,000 or 2% of building cost (if < 1 million)
• • If R/M exceed 10,000, all improvements capitalized

Question 4

Rules when property is received by an individual as a result of an inheritance?

Answer 4

• Receipt is nontaxable
• Basis to determine estate taxes for decedent is FV at date of death or election made to use earlier of date property transferred or 6 months after death
• On subsequent sale, G/L always LT

Question 5

Rules when property is received by an individual as a result of a gift?

Answer 5

• Gifts excluded from gross income
• C/o basis, c/o holding period for gifted appreciated property
• When FV of property lower than donor basis, use dual-basis: subsequent selling price>basis=gain; selling price

Question 6

Rules for wash sales

Answer 6

Losses not deductible
Asset sold at a loss and repurchased within 30 days of sale
Loss added to basis of repurchased asset
(They key is the number of shares purchased is the number of shares disallowed for the loss, Ex: Purch 50 shares at 140, sell 50 shares at 180 gives 2,000 loss. Purch 25 shares within 30 days, so 25 shares of the 40 share loss is disallowed)

Question 7

Sales to related parties tax treatment

Answer 7

Sales between everyone except uncle, aunt, nephew,in-laws (Maj. share and corp is related)
Cannot deduct loss, gains fully taxable
Subsequent sale use dual-basis treatment

Question 8

Like-kind exchanges rules

Answer 8

1031 exchange (tangible, not stock and other securities)
FV of property received (or relinquished, depending on question)
(Basis prop relinquished)
= Realized Gain (recognize up to boot rec’v)
Boot= Cash rec’v + unlike prop+relief from debt>debt assumed
Gain= lesser of boot rec’v or realized gain

Question 9

Conditions to execute like kind exchanges even when sale and acquisition are in separate transactions

Answer 9

1. Proceeds from sale must not be rec’v-pay into escrow held by qualified intermediary
2. Replace prop identified w/ in 45 days after sale
   - may identify more than 1 prop as potential as long as No more than 3 prop identified OR total FV of all identified prop doesn’t exceed 200% of FV of prop that was sold
3. Replacement prop must actually be acquired w/ in 180 days of the sale

Question 10

Tax treatment of involuntary conversions

Answer 10

Section 1033- gain deferred if prop is replaced w/ in statutory limit (use calendar year proceeds rec’v)
2 yrs- destruction/theft of prop (ins recovery)
3 yrs- Gov condemnation, eminent domain
4 yrs- declared federal disaster
** When proceeds not fully reinvested in new prop, gain is taxed to extent of unreinvested amount (deferred gain reduces basis of replacement prop, losses on Sch A theft/casualty

Question 11

Tax treatment for sale of personal asset

Answer 11

Gains taxed

Losses not deductible (consumption loss)

Question 12

Treatment for sale of personal residence

Answer 12

Live in principal residence for 2 of last 5 years the first 250,000 (500,000 MFJ) not recognized
- don’t meet 2 yr req but forced to sell bc change in employment (50+ miles) or unforeseen event, then pro rata exclusion applies

Question 13

Stock dividend basis

Answer 13

Div included in income (only when shares are sold) when rec’v, basis= FV at dist date
If nontaxable when rec’v, then basis of original stck is allocated between dividend and original stck in proportion to their relative FV (holding period of dividend stck includes holding period of original stck)
[basis of original shares divided by (originally owned shares+shares rec’v)= new basis per share]

Question 14

Installment sales method tax treatment

Answer 14

Form 6252- sell prop, where at least 1 payment will be rec’v after year of sale:
GP
/contract price
= GP%
x cash collected
= Installment sale income
* Not avail for stocks or gains on prop held for use in ordinary business
* Depreciation recapture reported in income in year of sale

Question 15

Losses on deposits in insolvent financial institutions

Answer 15

Estimated as either:

1. Casualty loss on Sch A (10% AGI -100) related to personal use prop (form 4864)
2. Ordinary loss on Sch A (Misc 2%)
   * Not avail if any part were FDIC (max deduction 20,000 [10,000 MFS] and subject to reduction by 2% of AGI)
   * * If actual loss>estimated amount taken on Sch A, excess=nonbuisness bad debt in yr of actual loss, STCL on Sch D up to 3,000 per yr

Question 16

LT Construction contracts

Answer 16

Generally % of completion, but completed contact ok for home construction contracts or any other project that will be completed w/ in 2 years and avg annual gross receipts for 3 prev yrs is 10 million or less

Question 17

Under the uniform capitalization rules, the following costs must be included in inventory…

Answer 17

All direct cost of the property
Indirect costs (such as off-site storage costs)
The following costs are never capitalized to inventory: selling, marketing, advertising, and distribution expenses.

Question 18

The basis of property acquired in a tax-free exchange is equal to the adjusted basis of the property surrendered, or..

Answer 18

1. The amount derived when the unrecognized gain is subtracted from the FMV of the new asset or
2. The amount derived when the unrecognized loss is added to the FMV of the new asset.

Question 19

When business equipment such as machinery that has been held for 12 months or less is sold at a gain, how is the gain reported for taxes?

Answer 19

Ordinary gains

Question 20

For a cash-basis taxpayer, gain or loss on a year-end sale of listed stock arises on what day?

Answer 20

Trade date

Question 21

Which of the following costs is includible in inventory under UNICAP rules for merchandise manufactured by a company for sale to its customers?

Answer 21

• Manufacturing overhead costs such as indirect labor, indirect materials, purchasing costs, and engineering are capitalized
• Nonmanufacturing costs are NOT capitalized: such as selling, research, product liability, and service department costs

Question 22

The passive activity loss rules are applicable to…

Answer 22

individuals, estates, trusts, closely held C corporations, and personal service corporations (not applicable to p/s, widely held C corp, or S corp. For p/s and S corps, the passive activity loss rules apply at the partner/shareholder level.)

Question 23

How to net cap gain (loss) reported by the individual and at what applicable tax rate(s)?

Answer 23

Capital losses will be offset against capital gains (net long term first then short term), beginning with the gains taxed at the highest rates.
* Collectibles at 28%, then Unrecaptured 1250 gains at 25%, then cap gains at 15%

Question 24

How is 1244 stock treated?

Answer 24

If appreciates, cap gain

If declines, ordinary loss up to 50,000 (100,000 MFJ) the remaining is cap loss subject to 3,000 limit

Question 25

If a security becomes worthless in the current taxable year, it is treated as sold or exchanged on

Answer 25

The last day of the current taxable year

Question 26

Treatment for the sale of life insurance proceeds

Answer 26

Generally, proceeds by reason of death of the insured are excluded from gross income
When subsequently transferred in exchange for consideration, it is a purchased asset (proceeds less costs and premiums paid = included in gross income

Question 27

Figuring gross profit on installment slae

Answer 27

Proceeds
\+ Debt assumed by the buyer
- basis
- expenses incurred
= GP

Question 28

Calculate basis of property received in a 1033 like-kind exchange

Answer 28

Basis of prop given up
+/- gain (loss) recognized
- FV boot rec’v (+FV boot given) [liab assumed= boot given, liab relieved=boot received]
** If easier, FV of asset rec’v less the unrecognized portion of the realized gain equals the new basis

Question 29

Calculate realized gain on like kind exchanges

Answer 29

FV asset rec'v
\+/- Boot rec/given up
- Basis asset given up
= Realized gain
** If exchanged equitable assets can use..
FV asset given up
- Basis given up
= Realized gain